Alternatives to Closing a Company: Sale, Merger, or Transfer

Liquidating a company is often a time-consuming and administratively complex process that typically takes 6 to 12 months. However, many entrepreneurs are unaware that Czech law offers faster and more efficient alternatives. Selling a company, statutory merger, or transferring assets to a partner allow you to close your business without classical liquidation – often within a few months and without the risks associated with a liquidator's personal liability.

Why Consider Alternatives to Company Liquidation?

The decision to cease operations is one of the most significant strategic decisions any business owner faces. In practice, however, company leaders often automatically assume that voluntary liquidation under § 187 et seq. of the Business Corporations Act is the only solution. This assumption does not reflect the reality of the Czech legal environment.

Classical liquidation of an LLC or joint-stock company is a formal process in which the company enters a special "liquidation" status, a liquidator is appointed, creditors receive a three-month notice period, and the liquidation assets are gradually monetized. This process binds the company to strict legal deadlines, mandatory financial statements, and numerous administrative obligations to the Commercial Register, the tax authority, and the Social Security Administration.

For many companies – especially those with a functioning business model, an unblemished commercial reputation, and organized assets – alternative legal routes exist. These alternatives allow termination of the company without liquidation based on universal succession, a legal institution where all assets, liabilities, and employment relationships transfer to a legal successor in a single moment. 

Lawyers at ARROWS Law Firm specialize in advising on this matter and regularly handle cases where sale or transformation is more suitable for the client than liquidation – contact us at office@arws.cz.

Alternatives to liquidation include in particular:

• Sale of a company (share deal) or its assets (asset deal)
• Merger of companies (merger or consolidation under the Transformation Act)
• Transfer of assets to a partner (a special form of transformation under § 174 et seq. of the Business Corporations Act)
• Cross-border mergers within the European Union

Each of these routes has specific legal, tax, and business considerations. The choice of the right option depends on the company's asset structure, number of shareholders, existence of liabilities, owners' intentions, and strategic goals such as generational transition or group restructuring. Lawyers at ARROWS Law Firm, a leading Czech law firm based in Prague, European Union, regularly help foreign and Czech clients select the optimal solution according to their specific situation – write to us at office@arws.cz.

Share Deal vs. Asset Deal: Which Structure to Choose When Selling a Company?

When selling a company, both seller and buyer face a fundamental decision: sell the company's shares or interests (share deal) or sell selected assets and liabilities (asset deal)? This choice has a critical impact on the scope of assumed risks, the tax consequences of the transaction, and the administrative burden of the entire process.

Sale of Company Shares or Interests (Share Deal)

A share deal means the buyer acquires business interests or shares in the company. The company itself remains intact as a legal entity – only its ownership structure changes. All assets, liabilities, contracts, licenses, employees, and the company's history remain untouched.

From a legal perspective, a share deal is relatively straightforward: the buyer and seller execute a share purchase agreement, and for LLC interests, the signatures of both parties must be notarially certified. The abbreviated form of the agreement is then filed in the Commercial Register. The entire process can take place within a few weeks.

The main disadvantage of a share deal is that the buyer assumes all of the company's rights and obligations, including historical liabilities. This includes hidden risks such as unresolved disputes, unpaid taxes, warranty obligations from past transactions, or unpaid employee wages. Buyers therefore must conduct thorough legal, accounting, and tax due diligence to identify what risks the transaction actually entails. In practice, a seemingly "clean" company often carries hidden liabilities that only emerge after the transaction closes.

Lawyers at ARROWS Law Firm have extensive experience conducting complex due diligence processes in acquisitions. Through daily work with international transactions within the ARROWS International network, built over ten years, we can identify potential risks early and structure the transaction to maximize the buyer's protection – contact us at office@arws.cz.

A major tax advantage of share deals is a new rule effective January 1, 2026: income from the sale of interests and shares above CZK 40 million is exempt from income tax, provided the holding period test is met (3 years for shares, 5 years for business interests). This exemption was temporarily repealed in 2025 but returns in 2026, making share deals very tax-attractive for long-term investors.

Sale of Selected Assets and Liabilities (Asset Deal)

An asset deal is a transaction structure in which the company as a whole does not transfer, but rather selected assets and possibly liabilities transfer. This typically involves the transfer of real estate, machinery, technology, business contracts, employment relationships of selected employees, trademarks, or know-how.

The key advantage of an asset deal is the possibility of selective choice – the buyer can precisely determine what it is purchasing and what risks it is willing to assume. Unwanted assets, disputed liabilities, or risky contracts remain with the selling company. This control over the transaction's scope is a critical advantage for the buyer, especially if the target company carries significant legal or economic risks.

The disadvantage of an asset deal is its administrative and legal complexity. Each type of asset is governed by a different legal regime: transfer of real estate requires registration in the Real Estate Cadastre, transfer of trademarks requires registration with the Industrial Property Office, and transfer of vehicles requires registration in the Motor Vehicle Register. 

Business contracts often contain provisions requiring third-party consent for transfer. Employment relationships of employees transfer by law (under § 338 of the Labor Code), which involves obligations to notify employees at least 30 days in advance and respect their rights.

Lawyers at ARROWS Law Firm specialize in preparing complex asset deals, including coordinating all concurrent legal steps, securing third-party consents, and properly handling employee transfers under Czech labor law – write to office@arws.cz.

microFAQ – Legal Tips on Selling a Company

1. Is it better to sell shares or assets if the company has unresolved litigation? 

In such situations, an asset deal is preferable because disputes remain the seller's responsibility. A share deal would mean the buyer assumes all dispute-related matters. 

2. Must I conclude new employment contracts with employees in an asset deal? 

No. Employment relationships transfer to the buyer automatically by law under § 338 of the Labor Code if the criteria for transfer of rights and obligations from employment relationships are met. The buyer must, however, properly inform employees at least 30 days in advance. 

3. What is the notary's role in a share deal? 

In the sale of an LLC interest, the law requires notarially certified signatures of both the seller and buyer on the transfer agreement. Subsequently, the abbreviated form of the agreement is filed in the Commercial Register to register the change of shareholder. 

Risks and Penalties	How ARROWS Helps (office@arws.cz)
Hidden Risks in Share Deal: Historical liabilities, unpaid taxes, unresolved disputes, or unpaid employee wages that the buyer assumes with the company	Comprehensive Due Diligence: ARROWS lawyers will conduct detailed legal, tax, and labor law review of the target company and identify all risks in time, so the buyer knows what it is acquiring
Inadequate Buyer Protection: If the agreement lacks appropriate seller representations and indemnification mechanisms, the buyer may suffer significant financial losses	Preparation of Contractual Documentation: ARROWS Law Firm structures the transaction to include appropriate representations and warranties, price adjustment mechanisms, warranty periods, and escrow arrangements
Failure to Inform Employees: If the buyer or seller fails to inform employees at least 30 days before transfer, employees have the right to terminate employment immediately with a right to severance	Ensuring Labor Law Compliance: ARROWS prepares all employee and trade union notices in accordance with § 339 of the Labor Code and ensures compliance with all deadlines and formal requirements

Mergers and Consolidations: Terminating a Company Without Liquidation

Company mergers are one of the most efficient methods of ending the existence of one or more companies without undergoing classical liquidation. Legally, this involves a "transformation" under Act No. 125/2008 Coll. on Transformations of Commercial Companies and Cooperatives, which enables so-called universal succession – the transfer of all assets, rights, liabilities, and employees to a legal successor in a single moment, without the need to transfer individual assets separately.

Company Merger (Merger by Acquisition)

In a merger, one or more companies (disappearing companies) cease to exist and all their assets, liabilities, and legal relationships transfer to another company (successor company), which continues operations. The disappearing company is deleted from the Commercial Register on the date of the merger registration, without undergoing liquidation.

This form of transformation is typically used in the consolidation of company groups, where a parent company absorbs a subsidiary company, or vice versa. It may be a domestic merger (both companies are Czech) or a cross-border merger within the EU or EEA – and as of July 2024, also mergers with companies from third countries outside the EU.

The merger process is strictly regulated and contains numerous mandatory steps that cannot be omitted:

Decisive Date: The companies must determine a decisive date from which all accounting operations of the disappearing company are considered operations of the successor company. This date cannot be older than 12 months before the application for registration of the merger is filed in the Register.

Merger Project: The statutory bodies of both companies must prepare a detailed merger project containing the company names and addresses of all participating companies, the exchange ratio of business interests or shares, information about what rights will be granted to shareholders of the disappearing company, and other legally required information. The project must be filed in the Register of Deeds and published in the Commercial Gazette.

Creditor Notice: The merger project must be published and creditors of all participating companies must be invited to submit objections. The general deadline is one month from publication.

Expert Appraisal: If the merger results in an increase in the successor company's share capital from the assets of the disappearing companies, the net assets of the disappearing companies must be appraised by an expert appointed by the court. An exception applies to so-called "100%" mergers of parent and subsidiary companies or sister companies with identical owners.

Approval by General Assembly: The merger project must be approved by the general assemblies of all participating companies. For a Czech company, a general assembly resolution in the form of a notarial record is required. The general assembly of the successor company may be held no earlier than one month after publication in the Commercial Gazette.

Registration of Merger in the Commercial Register: The application for merger registration must be filed within 12 months of the decisive date. The merger becomes legally effective on the date of registration in the Commercial Register of the successor company.

Notification of Authorities: After the merger is registered, the successor company must notify changes to the business licensing authority, tax authority, Social Security Administration, health insurance companies, Real Estate Cadastre (if the company owns real estate), and other relevant authorities.

Lawyers at ARROWS Law Firm provide comprehensive legal services for mergers and transformations – from strategic advice and preparation of transformation projects through representation before the Commercial Register and ensuring all notifications to authorities. With experience in cross-border transactions within the ARROWS International network, we can effectively manage complex international mergers within the EU – contact us at office@arws.cz.

New Type of Transformation from July 2024: Separation (Demerger by Separation)

An amendment to the Transformation Act effective July 19, 2024, introduced a new type of transformation: separation (demerger by separation). This institution significantly expands the possibilities for restructuring company groups.

Unlike classical split-up or spin-off, in separation the company itself does not cease to exist. Part of its assets and liabilities are separated into one or more successor companies, while the separated company itself becomes a shareholder of the successor company – not its existing shareholders.

Practical example: company ALPHA LLC has two business divisions: manufacturing and services. The owners decide to separate services into a separate company BETA LLC. In classical spin-off, ALPHA's shareholders would receive shares in the newly created BETA. In the new separation, ALPHA itself receives 100% of the shares in BETA, making BETA a subsidiary of ALPHA. The existing shareholders' ownership structure in ALPHA remains unchanged.

This tool can serve as an efficient alternative to contributions to business assets and in some cases may even eliminate the need for expert appraisal. ARROWS Law Firm, a law firm based in Prague, European Union, will advise clients on whether this modern instrument is suitable for their restructuring – write to us at office@arws.cz.

Cross-Border Mergers in the European Union

For companies that are part of an international group with a European structure, cross-border merger under EU rules may be the most efficient way to terminate a Czech company. A Czech subsidiary can be merged (absorbed) into its foreign parent company in another EU or EEA member state.

The advantage of cross-border merger is that the Czech company ceases to exist without liquidation, the parent company becomes its universal legal successor, and the entire process is typically faster and administratively simpler than classical liquidation. 

Lawyers at ARROWS Law Firm have extensive experience with cross-border mergers and, through long-term cooperation within the ARROWS International network, built over more than ten years, can effectively coordinate the transaction with foreign legal systems – contact us at office@arws.cz.

microFAQ – Legal Tips on Mergers

1. Can I merge a company that has debts? Yes, merger of a company with liabilities is possible if the company is solvent (not in insolvency). Universal succession means the successor company assumes all liabilities of the disappearing company. If the disappearing company is insolvent, insolvency proceedings must be initiated instead. 

2. How long does the merger process take? The standard timeframe from preparation of the merger project to registration in the Commercial Register is approximately 3 to 6 months. It depends on the complexity of the structure, the need for expert appraisal, and the speed of the authorities.

Risks and Penalties	How ARROWS Helps (office@arws.cz)
Gun-Jumping (Premature Transaction Execution): If companies carry out a merger subject to approval by the Office for Protection of Competition without prior notification and approval, a fine of up to CZK 72 million or 10% of net turnover is threatened	Assessment of Notification Obligation and Preparation of Notification: ARROWS lawyers will determine whether the transaction is subject to merger control, prepare complete notification documentation, and ensure approval before closing the merger
Failure to Meet Legal Deadlines: The application for merger registration must be filed within 12 months of the decisive date. Missing this deadline may result in rejection and the need to prepare the entire project anew	Legal Coordination and Deadline Management: ARROWS Law Firm will prepare a timeline of all steps, ensure timely approval by general assemblies, notarial records, and filing of the register application within legal deadlines
Incorrect Expert Appraisal: If expert appraisal of net assets is required and conducted incorrectly, or the expert is not appointed by the court, the register court may reject the merger application	Coordination with Court-Appointed Expert: ARROWS will prepare supporting documentation for expert appraisal, arrange contact with the expert, and verify that the appraisal meets all legal requirements

Transfer of Assets to a Partner: A Fast Way to End a Company

Transfer of assets to a partner is a specific form of company transformation that allows rapid termination of the company without liquidation if the company has only one shareholder or one shareholder pays out the others.

This transformation is governed by § 174 et seq. of the Business Corporations Act and § 12 of the Transformation Act. The essence is that the company ceases to exist and all its assets (including assets, liabilities, and employment relationships) transfer to the partner – the acquiring partner. This partner must be a natural or legal person with residence or registered office in the Czech Republic and must be an entrepreneur (holder of business authorization or other form of business permission).

Basic Conditions for Asset Transfer to a Partner

Sole Shareholder or Settlement of Others: If the company has multiple shareholders, the acquiring partner must provide appropriate compensation in cash to the other shareholders, the amount of which corresponds to the real value of their interests. The appropriateness of compensation must be confirmed by an expert appraisal.

Business Authorization of Acquiring Partner: The acquiring partner must be an entrepreneur as of the project preparation date and the date of filing the application for registration in the Commercial Register.

Asset Transfer Project: A written asset transfer project must be prepared containing the same requirements as a merger project (company name and address, identification of the acquiring partner, amount of compensation for other shareholders, the decisive date of transfer, etc.). The project is filed in the Register of Deeds and published in the Commercial Gazette.

Opening and Closing Financial Statements: The acquiring partner must prepare an opening balance sheet showing what assets it is acquiring. The company prepares a so-called closing financial statement as of the decisive date.

Legal Effects: The asset transfer becomes legally effective on the date of registration in the Commercial Register. From that moment, the company ceases to exist and the acquiring partner becomes the universal legal successor, assuming all rights and obligations including liabilities to creditors, employees, and the state.

Practical example: John Smith is the sole shareholder of SMITH Construction LLC, which he no longer needs because he is ceasing operations. The company owns a van, workshop equipment, and has standard business contracts. Smith can use asset transfer to a partner, whereby the company ceases to exist and all assets (including the van, inventory, and liabilities) transfer to him as a business entrepreneur. The entire process is faster and cheaper than classical liquidation.

Watch Out for Cross-Liability

A specific risk to keep in mind, particularly when considering purchasing a company that recently underwent transformation (such as a split-up or spin-off), is so-called cross-liability (joint and several liability). This institution protects creditors and means that in the event of company division, all successor companies are jointly and severally liable for liabilities that were divided among them – up to the value of assets allocated to them during the transformation.

Cross-liability persists for a time period set by law. A buyer who acquires a company shortly after its transformation may unknowingly assume liability for the obligations of other entities created during the transformation. Lawyers at ARROWS Law Firm will conduct a thorough review of the target company's history and identify any cross-liability in advance, so the buyer does not enter into hidden risks – write to us at office@arws.cz.

Risks and Penalties	How ARROWS Helps (office@arws.cz)
Absence of Business Authorization for Acquiring Partner: If the acquiring partner lacks business authorization, the register court will reject the application and the entire asset transfer project will fail	Securing Business Authorization and Registration: ARROWS Law Firm will ensure the acquiring partner obtains necessary authorizations before the asset transfer project begins and provides assistance in communicating with business licensing authorities
Inadequate Compensation for Other Shareholders: If compensation is set at an incorrect amount or is not supported by expert appraisal, court disputes and transformation invalidity may occur	Coordination of Expert Appraisal and Contract Preparation: ARROWS lawyers will arrange for expert appraisal by a court-appointed expert and formulate fair compensation terms for all parties
Transfer of Hidden Liabilities to Acquiring Partner: The acquiring partner becomes the universal successor and assumes all company liabilities including those that may not be immediately apparent (unresolved disputes, unpaid taxes, employee claims)	Due Diligence Before Transfer: ARROWS Law Firm will conduct comprehensive legal, tax, and labor law review to ensure the acquiring partner knows precisely what liabilities it assumes and can prepare accordingly

Automatic Employee Transfer: Obligations and Unavoidable Risks

When selling a company, merging, or transferring assets to a partner, Czech law provides for automatic transfer of rights and obligations from employment relationships to the new employer – so-called employee transfer by law under § 338 et seq. of the Labor Code.

This institution is often underestimated and incorrectly interpreted by foreign investors coming from legal systems where employees do not automatically transfer. In Czech law, however, employees "follow" their business or its part – regardless of their consent and without the need to conclude new employment contracts.

When Do Employees Transfer?

Transfer of rights and obligations from employment relationships occurs whenever there is a transfer of an economic unit that maintains its identity as an organized set of resources whose purpose is to conduct economic activity. The Labor Code identifies the following situations where transfers typically occur:

• Transfer or change of rights and obligations from employment relationships (e.g., sale of a business, part of a business, merger, division)
• Transfer or change of ownership rights to a business
• Transfer or change of rights to manage business assets

Importantly, transfer may occur even with transfer of a part of a business – for example, the sale of one branch, one division, or a specific set of assets, if this part represents an economic unit capable of independent existence. Lawyers at ARROWS Law Firm will assess whether the planned transaction triggers employee transfer and ensure all obligations are met – contact us at office@arws.cz.

Obligation to Inform Employees: 30 Days in Advance

The Labor Code imposes a strict obligation on both employers (the current and acquiring employer) to inform employees about the planned transfer. This information obligation must be satisfied no later than 30 days before the date of transfer effectiveness.

Information must be provided to:

• Trade unions or worker councils if they exist with the employer
• Directly to all employees if no trade union or worker council exists

The content of the information is strictly defined by law. It must contain:

• The planned date of transfer
• Reasons for the transfer
• Legal, economic, and social consequences of the transfer for employees
• Planned measures in relation to employees (such as planned organizational changes)

Failure to meet this obligation is a serious breach of law that entitles employees to immediately terminate employment with a right to severance – which represents significant financial risk for the acquiring employer. Lawyers at ARROWS Law Firm regularly prepare employee notices under § 339 of the Labor Code for domestic and international clients operating in the Czech Republic and ensure all formal and substantive criteria are met – write to office@arws.cz.

Three Scenarios for Terminating Employment in Connection with Transfer

Employees cannot prevent the transfer, but Czech labor law gives them three different options to terminate employment in connection with the transfer. Each has different legal consequences.

Scenario 1: Notice BEFORE Transfer (§ 51a(1) of Labor Code)

If the employee was properly and timely informed (30 days in advance), they may submit notice of employment termination. Employment ends at the latest on the day preceding the date when the transfer becomes effective. For the acquiring employer, this scenario is "clean" – the employee does not transfer at all and no severance is owed.

Scenario 2: Notice AFTER Transfer Due to Failure to Inform (§ 51a(2) of Labor Code)

This scenario is punitive in nature. If employers fail to properly and timely inform employees, the employee may submit notice even after the transfer, within 2 months from the date the transfer becomes effective. The notice period in this case is only 15 days. For the buyer, this scenario is operational disaster – you buy a company and for two months afterward, key employees can leave with only 15 days' notice.

Scenario 3: Immediate Termination AFTER Transfer Due to Material Worsening (§ 339a of Labor Code)

This is a financial bomb for the buyer. The employee transfers to the new employer, but the new employer attempts to change employment conditions (for example, reduces pay, removes benefits, changes place of work, or fundamentally changes job duties). The employee then has the right to immediately terminate employment and is entitled to severance pay, typically ranging from one to three months' salary depending on length of service.

This scenario occurs when the buyer underestimates the employee transfer and attempts to unilaterally modify conditions. Lawyers at ARROWS Law Firm provide training for the HR departments of acquiring companies on how to properly communicate with employees after transfer and how to structure possible changes in compliance with the Labor Code – write to office@arws.cz.

Employee Debts Transfer Automatically

Because all rights and obligations from employment relationships transfer, the buyer assumes liabilities to employees that arose before the transfer. This includes unpaid wages, unreimbursed travel expenses, or unpaid overtime hours.

Although the European directive allowed for a joint and several liability regime (joint liability of transferor and acquiring employer), Czech legislators did not fully utilize this option. The buyer may become the sole entity against which employees can assert their claims. Thorough due diligence of labor law matters is therefore essential – lawyers at ARROWS Law Firm will review wage records, vacation usage, and all employee claims before the transaction closes – contact us at office@arws.cz.

microFAQ – Legal Tips on Employee Transfer When Selling a Company

1. Must employees sign consent for transfer or new employment contracts? 

No. Transfer is automatic by law; their consent is not required. Concluding a new contract is not necessary – the old contract continues. Requiring employees to sign amendments can actually be risky. 

2. Can I as the new owner immediately dismiss certain employees? 

The transfer of rights and obligations alone is not a valid reason for employment termination under the Labor Code. However, you may subsequently conduct standard organizational changes (e.g., redundancy due to restructuring) if you have real and economically justified reasons.

3. What happens to the collective agreement concluded with the trade union? 

The collective agreement concluded with the transferor employer remains in effect with the acquiring employer for one year from the transfer unless the parties agree otherwise. After this period, employment relationships continue under individual employment contracts. 

Key to Safe Transactions: Due Diligence and Valuation

Regardless of the chosen transaction structure (share deal, asset deal, merger, or asset transfer), conducting thorough legal and financial due diligence is absolutely critical for the safety of both buyer and seller.

Due diligence is a systematic process in which the buyer (or their legal, tax, and financial advisors) examines the target company or assets to identify all risks, liabilities, and potential problems that may affect the transaction value or future business operations.

Scope of Legal Due Diligence

Standard legal due diligence includes the following areas:

Corporate Governance and Registration Documents: Verification of articles of association or partnership agreements, Commercial Register extracts, ownership structure, history of register changes, documentation of general assemblies and statutory body decisions. Common problems include incomplete filing of deeds – missing financial statements or reports on relationships between connected persons.

Contractual Documentation: Review of all material business contracts (supplier contracts, customer agreements, leasing contracts, service contracts, licensing agreements), verification that they do not contain change of control clauses requiring third-party consent for share transfer or ownership change.

Real Estate and Assets: Verification of real estate ownership in the Real Estate Cadastre, verification of mortgages and easements, review of lease agreements, and verification of movable assets.

Intellectual Property: Verification of registration of trademarks, patents, industrial designs, and copyrights, review of license agreements.

Litigation and Administrative Proceedings: Identification of ongoing or threatened disputes, administrative proceedings, tax audits, or executions.

Labor Law Matters: Review of employment contracts, collective agreements, compliance with wage regulations, vacation usage records, unpaid wages and employee liabilities, verification that no administrative proceedings are pending for labor law violations.

Licenses and Permits: Verification of validity of business authorizations, building permits, completion certificates, environmental permits, and other relevant licenses.

Tax Position: Verification of tax returns for recent years, identification of unpaid taxes, determination of ongoing or threatened tax audits.

Lawyers at ARROWS Law Firm conduct comprehensive legal due diligence for domestic and foreign clients. Through daily work with international transactions within the ARROWS International network, built over ten years, we can identify specific risks of the Czech legal environment that foreign investors often overlook – contact us at office@arws.cz.

Expert Valuation: When Is It Mandatory?

In several cases, Czech law requires valuation by a court-appointed expert. These include in particular:

Merger with Share Capital Increase: If a merger results in an increase in the successor company's share capital from the assets (capital) of disappearing companies, the net assets of the disappearing companies must be appraised by an expert appointed by the court. An exception applies to so-called "100%" mergers of parent and subsidiary companies or sister companies with identical owners.

Asset Transfer to a Partner with Multiple Shareholders: If the acquiring partner pays compensation to other shareholders, the appropriateness of such compensation must be confirmed by expert appraisal.

Non-Cash Contribution to Share Capital: When establishing a company or increasing share capital by non-cash contribution (e.g., real estate, business interest, machinery), an appraisal by a court-appointed expert is required.

An expert is appointed by the relevant district court at the company's request. The valuation must be conducted according to generally recognized valuation methods and must correspond to actual (ordinary) value. Lawyers at ARROWS Law Firm coordinate the process of court appointment of an expert, prepare supporting documentation for valuation, and verify that the prepared appraisal meets all legal requirements – write to us at office@arws.cz.

Tax Implications of Different Solutions

The choice between sale, merger, or asset transfer has fundamental tax implications for all parties involved. Tax optimization is legitimate and desirable as part of strategic planning if conducted in accordance with law.

Tax Implications of Share Deal

When selling business interests or shares (share deal), the seller realizes income from the sale of securities or interests, which is subject to income tax. For natural persons, as of January 1, 2026, a significant tax advantage applies: if the holding period test is met (3 years for shares, 5 years for business interests), the income is fully exempt from tax regardless of amount.

This rule represents a return to regulations that applied before 2025, when a CZK 40 million ceiling for exemption was temporarily introduced. From 2026, this ceiling for sale of interests and shares disappears again, making share deals very tax-attractive for long-term investors and business founders.

For legal entities (companies), income from interest sale is taxed as standard company income at the corporate income tax rate, which in 2026 is 21%.

Tax Implications of Asset Deal

When selling assets (asset deal), the selling company realizes income from asset sales, taxed at 21%. Capital gain is determined as the difference between sale price and book (accounting) value of the sold asset. If long-term depreciated assets (machinery, real estate) are sold with low book value, tax burden may be significant.

For the buyer, the advantage is that acquired assets can be depreciated at the new acquisition cost, creating tax-deductible expenses in subsequent years.

Tax Implications of Merger

Mergers represent a specific tax regime. If conditions of § 23c et seq. of the Income Tax Act are met, mergers may be carried out tax-neutrally – meaning without immediate tax burden. This means the successor company assumes the book values of assets and liabilities of the disappearing companies and does not revalue them to actual value.

Tax neutrality is one of the key advantages of mergers over sale and subsequent liquidation, particularly within company groups. ARROWS Law Firm cooperates with reputable tax advisors and can structure the transaction to achieve maximum tax efficiency – contact us at office@arws.cz.

Tax Implications of Liquidation

For comparison: in liquidation, after all liabilities are paid, the liquidation remainder is distributed to shareholders. This liquidation remainder is considered profit participation and for natural persons (if they do not hold business assets) is subject to 15% withholding tax. For shareholders resident in countries without a double taxation treaty, the rate may reach up to 35%.

Moreover, liquidation takes 6 to 12 months (including the three-month creditor period) and carries various administrative costs – liquidator fees, financial statements, expert appraisals, notarial acts. Lawyers at ARROWS Law Firm, a leading Czech law firm based in Prague, European Union, will advise whether sale or merger is more advantageous for your situation than liquidation – write to office@arws.cz.

When to Call an M&A Specialist Lawyer?

Whether you are considering selling your company, merging within a group, or transferring assets to yourself as sole shareholder, each of these paths carries specific legal, tax, and procedural risks. In practice, seemingly simple transactions often hide numerous pitfalls that laypeople may not see.

Typical examples where business owners underestimate complexity:

Unpreparedness for Automatic Employee Transfer: A foreign buyer assumes it can choose which employees to keep and fails to meet the 30-day advance notice obligation. Subsequently, key employees leave with severance pay, which significantly reduces the acquisition's value.

Overlooking Change of Control Clauses: The seller conducts a share deal without reviewing business contracts. After the transaction closes, they discover that a key supplier contract contains a change of control clause – and the supplier terminates the relationship.

Failure to Meet Notification Obligation in Merger: Companies execute a merger without determining that combined turnover on the Czech market exceeds CZK 1.5 billion. The Office for Protection of Competition initiates gun-jumping proceedings and may impose a fine up to CZK 72 million or 10% of net turnover.

Underestimating Hidden Liabilities in Share Deal: The buyer conducts only superficial due diligence and does not review the filing of deeds. After closing, they discover the company did not file financial statements for the last three years, violating § 66a of the Accounting Act, and administrative proceedings are pending for labor law violations.

Lawyers at ARROWS Law Firm have rich experience handling these matters and can identify potential problems in time. Our firm is a regular partner of corporate lawyers for handling special matters and provides comprehensive legal services for entire transactions – from strategic advice and preparation of contractual documentation through representation before the Commercial Register, tax authorities, and other state bodies – contact us at office@arws.cz.

Risks and Penalties	How ARROWS Helps (office@arws.cz)
Personal Liability of Director for Damages: If a director fails to ensure proper company termination and leaves it inactive, they may be personally liable for damages to creditors or the state, including unpaid taxes and Social Security shortfalls	Representation of Statutory Body Throughout Process: ARROWS Law Firm provides legal representation to the director during the entire liquidation, merger, or sale process and ensures all obligations are met, minimizing risk of personal liability
Unpaid Employee Claims After Transfer: The buyer assumes all debts to employees arising before transfer (wages, vacation, severance), which can represent significant financial burden if not identified during due diligence	Labor Law Matter Audit Before Transaction: ARROWS lawyers will review personnel documentation, wage statements, and vacation records and identify any employee liabilities before contract execution
Register Court Rejection: If merger, asset transfer, or shareholder change documentation does not meet legal requirements, the register court will reject the application and the entire process must be repeated, losing time and costs	Preparation of Complete Register Documentation: ARROWS Law Firm prepares all documentation for filing in the Commercial Register, including notarial records, expert appraisals, and attachments to meet all formal and substantive requirements

Executive Summary for Management

• Liquidation is not the only path: Sale of a company (share or asset deal), statutory merger, or asset transfer to a partner are faster and often safer alternatives to liquidation, which takes 6–12 months and carries liquidator personal liability risk.
• Transaction structure fundamentally affects risks: Share deal is faster but buyers assume all hidden liabilities including disputes and tax debts. Asset deal allows selective asset choice but is administratively burdensome and requires transfers of numerous individual items. The right choice depends on the company's condition and parties' risk tolerance.
• Automatic employee transfer is legal obligation, not choice: When selling or merging, employees transfer automatically to the new employer regardless of consent. Failure to inform 30 days in advance allows employees to leave with severance pay, potentially costing hundreds of thousands to millions of crowns depending on company size.
• Largest financial risks lie in hidden liabilities and penalties: Failure to notify the Office for Protection of Competition of qualifying mergers can result in fines up to 10% of turnover (tens of millions of crowns). Unidentified employee debts, tax liabilities, or creditor claims may drastically reduce transaction value. Due diligence is not "formality" but the only defense against these risks.
• Tax implications change dramatically in 2026 in favor of sales: Income from share and interest sales is exempt from tax from 2026 without limits if holding period test is met. Properly structured transactions can save millions of crowns compared to liquidation with 15–35% withholding tax on liquidation remainder.

Conclusion of the Article

The decision on how to terminate a company is a strategic move affecting financial results, time, and management risks. As explained in this article, classical liquidation is not the only – and often not the best – solution.

Alternatives like share deals, mergers, or asset transfers allow for faster termination and better control over liabilities. Each route has specific legal, tax, and procedural considerations that must be carefully evaluated based on the company's situation.

Successful transactions require timely preparation, thorough due diligence, and professional legal support. Legal matters often hide complex exceptions and links to regulations that laypeople frequently overlook.

Employee transfers, competition office notifications, and cross-liability are critical aspects to manage during a transition. These factors can fundamentally affect the overall success and legal security of the entire project.

ARROWS Law Firm specializes in mergers and acquisitions, serving both domestic and foreign clients. Our international network enables us to provide comprehensive advice on complex cross-border transactions.

Handling these matters independently increases the risk of errors, fines, or personal liability for damages. Our firm handles this agenda daily, shortening transaction times and providing insurance coverage up to CZK 400 million.

If you need advice on the best path for your company, do not hesitate to contact us. Write to us at office@arws.cz so you can focus fully on your business.

FAQ – Frequently Asked Legal Questions About Alternatives to Closing a Company

1. Can I sell a company that has unpaid liabilities? 

Yes, selling a company with liabilities is possible (particularly in a share deal), but the buyer assumes all liabilities including debts. Therefore, it is critical to conduct thorough due diligence and properly set the purchase price and buyer protection mechanisms (seller representations, escrow, price adjustment). If you are facing such a situation, write to us at office@arws.cz.

2. Is merger faster than liquidation? 

Yes, a standard merger typically takes 3 to 6 months from project preparation to Commercial Register registration, whereas liquidation usually takes 6 to 12 months and includes a mandatory three-month creditor notice period. Merger also allows business relationships to continue without interruption. 

3. Must I separately transfer all contracts in an asset deal? 

It depends on the contract type. Some contracts require third-party consent for transfer (especially if they contain change of control clauses), while others are transferable without consent. All contractual documentation must always be reviewed. ARROWS Law Firm lawyers will conduct an audit of all material contracts and ensure transfer proceeds in accordance with legal and contractual conditions – write to office@arws.cz.

4. What is the notary's role in a merger? 

The notary prepares a notarial record of the general assembly resolution approving the merger project. This notarial record is a legal requirement without which it is impossible to file the merger application in the Commercial Register. 

5. Can I reduce risk of assuming hidden liabilities in a share deal? 

Yes, several buyer protection mechanisms exist: (1) Thorough legal and tax due diligence to identify risks; (2) Seller representations and warranties in the agreement with indemnification mechanism; (3) Purchase price adjustment based on identified liabilities; (4) Escrow mechanism – part of the purchase price is temporarily held in escrow to cover potential future claims. ARROWS Law Firm structures transactions to maximize buyer protection – write to office@arws.cz.

6. Can I transfer a company to myself if I am sole shareholder and director? 

Yes, asset transfer to a sole partner is a legal form of transformation. As acquiring partner, you must be an entrepreneur (holder of business authorization) and must prepare an asset transfer project under the Transformation Act. All company assets including liabilities transfer to you and the company ceases to exist without liquidation. 

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the issue. Although we strive for maximum accuracy in the content, legal regulations and their interpretation evolve over time. To verify the current wording of the regulations and their application to your specific situation, it is therefore necessary to contact ARROWS Law Firm directly (office@arws.cz). We accept no responsibility for any damage or complications arising from the independent use of the information in this article without our prior individual legal consultation and expert assessment. Each case requires a tailor-made solution, so please do not hesitate to contact us.